Ethics in Finance: Case Studies

Insider Trading in HLL-BBLIL Merger: Key

terms
⚫ Present-day Hindustan Unilever Ltd. (HUL) was then
known as Hindustan Lever Ltd. (HLL)
⚫ Brooke-Bond Lipton India Ltd. (BBLIL) tea company
( owner of Taj Mahal, Brooke Bond, Lipton tea
brands).
⚫ Price-rigging
⚫ Persons collude to artificially decrease or increase the
share price
⚫ Insider trading
⚫ When a person having unpublished price-sensitive
information such as financial results, expansion plans,
takeover bids, by virtue of his/her association with a
company, trades its shares to make undue profits
The case
⚫ Unilever parent company, HLL and BBLIL sister concerns
⚫ HLL dished out money to buy BBLIL on behalf of Unilever, so
that the latter could acquire 51% stake in the post-merger
company
⚫ Prior to the merger was officially announced, HLL bought
800,000 shares of BBLIL from UTI
⚫ Jan 1996: Unilever decided on the merger
⚫ March 1996: HLL bought the shares
⚫ April 1996: Merger announced
⚫ Share price of BBLIL shot up
⚫ SEBI accused HLL of insider trading, having found it guilty of
acting on the basis of unpublished, price-sensitive information
regarding the merger
⚫ Against the interest of shareholders
⚫ Depriving the country of foreign exchange as Unilever would have
paid Rs.450-500 m to buy shares in the post-merger company
HLL’s side of the story
⚫ Though not officially announced, the merger
was generally known to the public and the
media
⚫ HLL had the privileged info because it was one
of the parties to the merger and not because it
was an insider
⚫ SEBI argued that several directors in the two boards
were common
⚫ HLL did not make a ‘profit’ from this deal
⚫ Paid UTI 10% more than the prevailing market rate
(Bought the shares at Rs.350 instead of the market
rate of Rs.318)
⚫ After the merger announcement was made, the share
price of BBLIL rose to Rs.405
Legal Action
⚫ Penalties imposed by SEBI
⚫ Rs.34 m compensation to UTI
⚫ Criminal proceedings against 5 of the companies’ common
directors
⚫ HLL appealed to the appellate authority (MoF)
⚫ MoF directive
⚫ Merger was generally known
⚫ SEBI’s order suffered from procedural deficiencies and
lacking in jurisdiction
⚫ Grey areas in SEBI act
⚫ Whether SEBI had the power to adjudicate a matter, prosecute,
and impose penalties
⚫ SEBI appealed in Mumbai High Court
Ketan Parekh Scam 2001
⚫ Known as the ‘Big Bull’ of Indian stock market
⚫ Price-rigging of specific shares
⚫ Zee Telefilms and Himachal Futuristic Communications Ltd.
HFCL illegally diverted Rs.6700 m to KP to buy their
shares).
⚫ Violated RBI guidelines (Banks can lend a max. of Rs.150
m to a broker)
⚫ KP borrowed Rs.2500 m from Global Trust Bank (GTB) to
ramp up GTB’s shares prior to its merger with UTI Bank.
⚫ KP borrowed Rs.10,000 m from Madhavapura Mercantile
Bank
⚫ FII Credit Suisse First Boston also gave loans to KP and
showed them as genuine financial transactions (brokerage
instead of interest) in its books
 Modus Operandi
⚫ Push up the share prices of selected firms in collusion with
their promoters
⚫ SEBI discovered price rigging in what came to be known
as the K-10 stocks
⚫ GTB, Zee Telefims, HFCL, Lupin Labs, Aftek Infosys,
Padmini Polymer
⚫ Role of UTI
⚫ Though UTI denied any links with KP, their purchases
aligned with KP’s buying behaviour
⚫ UTI also bought dubious stocks such as Arvind Johri’s
Cyberspace Infosys (erstwhile known as Century Finance).
⚫ Stock rose to Rs.1450 within a short span of its launching, and crashed
when BSE started investigation.
⚫ Johri was politically well-connected because of which SEBI was
reluctant to initiate investigation against him
 Penalties
⚫ Probes by Joint Parliamentary Committee, SEBI, SFIO.
⚫ KP and six stock broking firms have been debarred by SEBI from
undertaking any fresh business as stock-brokers or merchant bankers
⚫ Registration of these firms has been cancelled
⚫ KP and nine related entities have been debarred from buying, selling or
dealing in securities for 14 years
⚫ KP and three directors arrested by CBI
⚫ Penalties imposed on KP, his firm and three directors by Enforcement
Directorate of the IT Department, for violation of FEMA provisions
⚫ CBI filed chargesheet against former MD of SBI Mutual Fund and 32
others
⚫ Bought 2.2 m shares of Padmini Technologies at Rs165 per share, through
off-market deals with KP’s firms
⚫ In 1998, Bombay High Court sentenced KP and 6 others to one year
rigorous imprisonment for the 1992 scam, 2 got six months, and others
out on bail.
 The outcome
⚫ SFIO found that KP manipulated shares thru six companies, and the
extent of the fraud to the tune of Rs.30-40,000 crores.
⚫ SFIO report
⚫ KP managed the scam by circular trading, synchronised trading, effecting
cross deals, generating high volumes and price by acting in concert with
other brokering firms across the stock exchanges.
⚫ “The modus operandi was very systematic, well drilled and precisely
executed albeit within a close group of persons who were acting for the
furtherance of each other's interests”.
⚫ Part of the "illegitimate money " was taken out of the country using the
overseas corporate bodies (OCBs). "Various corporate entities issued shares
to OCBs and sub-accounts of the FIIs that were later purchased by these
entities from Parekh controlled companies to legitimately transfer money
out of the country".
⚫ The trading pattern and volume handled by sixteen Parekh controlled
companies is marked by a triple-fold hike in 2000-2001 as compared to
1999-2000. "In fact, the total volume of these entities was arguably many
times more than what was reflected in their annual accounts“.
⚫ In March 2014 KP was convicted by a special CBI court in Mumbai for
cheating and sentenced to two years rigorous imprisonment.